Is Coffee the New Leading Economic Indicator?

Mo’joe Cafe owner Adil Mouftakir has a pulse on the nation’s economy from his coffee shop in Berkeley, Calif.: A number of his regulars use his free Wi-Fi-enabled coffee shop as a quasi-office to search for jobs and do contract work.

Only half of Mouftakir’s customers are part of the traditional morning crush rush — people zipping in to get a cup of coffee to go as they head into the office. It’s a segment he hopes to grow to 80%, since it generates more business quickly than people languishing at the same table for hours after buying one cup of coffee and maybe a refill.

However, right now, business is slow, he said. “When the economy picks up, I hope to get more W-2 payroll customers. I may lose some of the non-W-2 customers, but I hope they continue to come here before they go into work.”

What Does the Daily Grind Tell Us About the Future?

This raises the light-hearted question of whether coffee could be the next leading economic indicator of Americans’ financial well-being.

Coffee consumption outside of the home reached its highest level in a decade between 2004 to 2006, as the nation’s annual average unemployment rate improved along with a stronger economy, according to data from the National Coffee Association of USA and a Moody’s Analytics analyst.

Coffee Consumption Outside of the Home

YEAR

2001

2002

2003

2004

2005

Outside Home

32%

34%

29%

40%

39%

Unemployment

4.7%

5.8%

6.0%

5.5%

5.1%

Economic Climate Backdrop

Recession

“Jobless Recovery”

” “

“UnemploymentImproves”

” “

YEAR

2006

2007

2008

2009

2010

2011

Outside Home

40%

33%

36%

35%

30%

27%

Unemployment

4.6%

4.6%

5.8%

9.3%

9.6%

*9.1%

Economic Climate Backdrop

” “

Recession

” “

” “

“Jobless Recovery”

” “

*Seasonally adjusted unemployment rate for month of July from Bureau of Labor Statistics

Source: National Coffee Association of USA for coffee consumption in the home and outside of the home; Bureau of Labor Statistics for annual average unemployment rate figures; Economic climate backdrop Moody’s Analytics.

“As consumers feel more comfortable with their jobs, it’s not surprising to see people spend more on coffee outside of their home,” said Ryan Sweet, a U.S. economist for Moody’s Analytics.

But is it ready for prime time as a leading economic indicator?

“Coffee is a fun thing to look at and maybe down the road it’ll be one of the indicators that economists will look at,” Sweet joked. “But economists like to stick to indicators that have a long track record for accuracy like jobless claims. We economists like to take our cues from history.”

Peaks, Valleys, and Percolators

Over the past decade, coffee consumption outside of the home has shown some reaction to the nation’s economy. In 2001, for example, coffee consumption outside of the home was in the low 30% range, as the nation entered a recession, and it remained there in 2002 and 2003, as the nation moved out of recession but unemployment remained high in what has been called the “jobless recovery,” Sweet said.

But in 2004, coffee consumption levels outside of the home soared to 40% from 29% in the previous year. That was about the time the nation’s unemployment picture began to turn around for the better, Sweet said.

Consumption levels outside of the home took a hit in 2007, falling to 33% from 40% the previous year. In late 2007, it was the technical start of the recession, though the annual average unemployment figures were at 4.6%, Sweet said. He added that the recession technically ended in June 2009 but has remained in a “jobless” recovery.

“The unemployed are forced to pinch pennies. Everything is on the table, including coffee,” Sweet said.

Ironically, there’s less penny pinching going on these days when it comes to consumers snapping up a cup a coffee at McDonald’s (MCD) or industry giant Starbucks (SBUX).

The house of Ronald McDonald reported that July comparable sales were up 4.4% in the U.S. over the year-ago period, driven by its McCafe beverage sales including frothy drinks like iced lattes and mochas. And Starbucks, which reported its third-quarter results last month, said its global comparable store sales in the quarter saw a 6% increase in foot traffic.

Hmm, What Gives?

Although coffee consumption levels outside the home hit the lowest level seen in a decade at 27% this year, there is a shift in attitude, noted Joe DeRupo, spokesman for the National Coffee Association of USA.

During the year, coffee consumption among drinkers between ages 18 and 24 years old increased to 31% from 40% over last year, while people between ages of 25 and 39 increased their consumption rate to 54% from 44% during the same period.

The increased consumption from this combined age group comes as 29% of them say they’re feeling “much or somewhat better” about their personal financial situation compared with six months ago, DeRupo noted.

Mo’joe Café’s Mouftakir, however, believes McDonald’s results come from the chain’s cheap $1 cup of coffee, which he suspects is siphoning off some of his cash-strapped customers and those of other independent coffee shops. As for Starbucks, he is baffled.

While economist Sweet is not yet ready to use coffee sales as a leading economic indicator, he did observe: “What this recovery needs is more caffeine. It needs more vigor.”

Motley Fool contributor Dawn Kawamoto does not own stock in any of these companies mentioned. She does, however, drink four cups of coffee a day and sometimes will top off at Starbucks, McDonalds or any number of coffee shops. The Motley Fool owns shares of Starbucks.